Meeting the Needs of Gold Investors TodayBy Ryoichi Seki, General Manager, Global Business Development, TOCOM
Published on September 25, 2017
Precious metals are the most active contracts on the Tokyo Commodity Exchange (TOCOM), Japan’s largest commodity futures exchange, representing 62% of exchange volume in the first half of 2017. Gold is the most active, comprising 43% of exchange volume. The Gold Standard (1 kg) contract is TOCOM’s flagship, comprising 26% of exchange volume in the first half of 2017, with an average daily volume of 24,348 lots – equivalent to 24 tonnes.
Japanese retail investors and major trading houses active both in Japan and overseas gold markets have contributed to the liquidity of the contracts offered. Japanese gold refineries also participate in the market as members. In addition, many international traders engage in arbitrage between TOCOM and other markets, including New York and London. Currently 55% of Gold Standard contract trading originates outside Japan.
While many new gold markets have opened in Asia in recent years, the TOCOM gold contract remains popular with investors from all over the world, and the exchange continues to innovate, which attracts participants from all over the world.
TOCOM has four physically delivered futures products – gold, silver, platinum and palladium – but it has been expanding the boundaries of the precious metals it offers (Figure 1).
To meet the demand for risk management and investment tools, gold options were introduced in 2004. The 1 kg, American-type contracts were revamped in September 2016 as 100 g, Europeantype contracts. To meet the needs of retail investors, TOCOM added mini and rolling spot contracts for gold and platinum. On top of these derivatives contracts, it began trading physical gold in 100 g and 1 kg quantities in July 2016. TOCOM’s gold market has evolved to include futures, options and physical trading, with a wide variety of hedging and trading opportunities.
Rolling Spot (“RS”) contracts were first introduced in May 2015 for gold and for platinum in March 2017. Unlike traditional futures, the RS contract has just one series that expires each business day. Open positions are automatically rolled to the next trading day. This feature allows participants to hold positions indefinitely, which facilitates longterm trading strategies.
Initially, Gold RS was well received by Japanese retail investors who needed a platform to execute such strategies. The participation of overseas investors made RS a successful contract for the exchange. It is now the second largest in open interest, and third in volume. Platinum RS is also experiencing similar success, with its open interest ranked fifth, just four-months after its launch (Figure 2).
The success of RS contracts is due the fact that they do not undermine existing contracts, but instead give investors additional liquidity. It also demonstrates that RS contracts address the market demand for new investment tools.
In July 2017, TOCOM added Brink’s Japan as a designated warehouse, the first of its kind without a Japanese parent company. The addition of Brink’s increases flexibility, especially for international market participants.
At the same time, TOCOM introduced rule changes for physical delivery. In principle, deliveries require a warehouse receipt. TOCOM now allows using alternative delivery arrangements when both counterparts agree to the delivery terms. As such, participants can now choose book entry transfer, or can deliver bullion approved by other industry organisations, such as LBMA Good Delivery bars.
With current global developments focused on central clearing obligations on OTC products and the introduction of benchmarking regulations, the trend has been to develop and introduce new exchange-traded products that offer solutions to cope with regulatory changes facing the precious metals industry.
While TOCOM has a long history, it continues to innovate, and is introducing a new gold index and is working together with an ETF provider to list ETF/ETN contracts based on the index, targeting its products at pension funds. The exchange is also searching for ways to integrate fintech in its operations, as it hopes to continue to support the global trading community for years to come.
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